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What’s Going to Occur with Cuba’s Foreign Exchange Market?

Cubans spend inordinate amounts of their time waiting in lines, while supplies run out before their turn comes. (14ymedio)

By Elías Amor Bravo (14ymedio)

HAVANA TIMES – It’s difficult to reply this query. With the dollar within the informal market above 130 pesos and rising, Cubans see with concern how access to the currency that permits the acquisition of basic necessities and services, which usually are not accessible in national currency, becomes increasingly complicated. And to curb these fears, the Ministry of Economy and Planning has decided to publish on its website a note that it says is “explanatory” but that confirms how clueless the leaders of the Cuban economy are on all these issues.

If a caveat is allowed to be introduced from the primary moment, the informative note says that “the foreign exchange market is the space where foreign currency is bought and sold, which allows the national currency and foreign currency echange to be connected” and well, here the primary “technical” error occurs when affirming that the market is an area.

It’s not true. Economic science says the other. It’s not a physical space, it’s something else. To associate the market with a spatial and even temporary reference is to trivialize something that operates in order that hundreds of thousands of choices by economic agents, expressed when it comes to supply and demand for all services and products, reach a simultaneous balance that leaves everyone in a greater position. And it’s not mandatory for it to have any “physical space.”

Then the equilibrium price of this market, somewhat different from the value of malanga or yam, which establishes the exchange rate between the various currencies and the national currency, depends, as in any market, on the position of supply and demand for foreign currency. Because the ministry’s note points out, on this market, “the providers of currency are export corporations, foreign visitors, recipients of remittances and other agents who receive foreign currency, while the demand comes from agents of the economy who have to import, travel abroad or who require foreign currency for other purposes.”

I definitely don’t get their accounting. Does the ministry really imagine that these are the one providers and demanders of foreign currency? They fall short and miss greater than 80% of operators. On this market, if demand exceeds supply, the exchange rate of the national currency will fall, and vice versa.

But really, the exchange rate market is rather more than that, and Cuban communists don’t appear to be clear of their note in regards to the true meaning of the exchange rate, which is nothing greater than the factor that establishes a relationship between the worth of the national economy and that of other, foreign economies.

They talk in regards to the connection of the productive agents with the skin world, each for his or her needs for input through imports and for the sale of their production through exports. But there may be rather more to that relationship between internal and external supply than these industrial issues, and never taking them into consideration is one other big mistake. For instance, access to financial and capital markets is a matter of primary relevance and doesn’t appear anywhere within the note.

The advice, subsequently, is that reasonably than taking into consideration supply and demand, attention have to be paid to a series of variables and indicators that influence the determination and evolution of the relative prices, that are the exchange rates.

And to do that, an exchange rate policy have to be designed that is expounded to and, at the identical time, serve the achievement of the remainder of the objectives of the national economic policy. The query is, does anyone know what those objectives are and what’s speculated to be achieved? We’re in bad shape.

There are few things which might be true within the ministry’s note, but one in all them, perhaps probably the most obvious, is to acknowledge that the market and its exchange rate have an influence on all the costs of the economy. However the influence is rather more than that, and as is being seen in Cuba, its biggest effect on prices is inflation, which is pushed upwards, unfairly, depending on the access to foreign exchange by different sectors of the population.

But, in turn, rising inflation deteriorates the exchange rate; subsequently, the interdependence between the 2 poses a danger to achieving exchange-rate stability and controlling inflationary pressures. What got here first, the chicken or the egg?

While Cuban communists try to seek out the reply, the conclusion is that when an exchange market is inefficient and doesn’t function properly, it generates distortions that prevent the success of the aforementioned objectives, limiting productive capability, economic growth and development of the country. They need to get to work as quickly as possible.

As for the legal or illegal access referred to within the informative note,  of economic agents to foreign exchange, offering security, confidence and transparency, there may be a transparent commitment to putting an end to the one market that has worked because the entry into force of the Ordering Task* (and subsequently, the foreign exchange market), which is the informal one, which began exchange services as soon because the Central Bank, bank branches, official exchange offices and airport offices stopped doing so. Aggression towards the informal market is an actual threat that may pose an eventual repression of individuals engaged in these activities, which might not only be unfair, but in addition inefficient. Who’s going to sell dollars in Cuba?

The note insists on the necessity to create and develop an official exchange marketplace for the Cuban economy, but that is counterproductive, because it doesn’t seem mandatory to remind government leaders that this market already exists. It was defined with a hard and fast official exchange rate of 1X24 and entered into force on January 1, 2021, with the start of the ordering task (it was one in all the measures included).

Subsequently, recreating what has already been created is a meaningless double back that must be translated into reality, which is none aside from assuming the failure of the primary launch and announcing this second, which looks prefer it won’t end well. For now, the regime begins to operate only with an exchange rate, which they are saying is “economically substantiated” but just for foreign exchange transactions and at just one address for the acquisition of foreign currency. The sale is neither there neither is it expected.

The note attributes to the foreign exchange market two functions that, at this point, seem like a chimera. The primary is to be certain that the national currency allows access to all the products and services of the economy, and to this end, dollarization is eliminated. This can be a difficult issue so long as the regime itself continues to support and encourage the stores that sell in MLC [freely convertible currency].

The minister declared within the national assembly that 70% of the country’s monetary circulation moves in Cuban pesos, while the remaining 30% accomplish that in MLC. Returning to stability positions from these levels might be rather more complicated than it seems. Dollarization and stores in MLC are a business for the regime that can hardly change.

The second function is to make sure macroeconomic balance. That is the one sensible thing contained in the knowledge note, but we’re very afraid that it’s quite impracticable. The note says that progress have to be made in reducing the fiscal deficit and monetary issuance. Perfect, what prevents the communists from lowering the deficit of 11% of GDP reached in 2021, greater than double that of 2019?

There is no such thing as a COVID-19 cost that justifies an expansion of spending of this magnitude, whose objective, as seen, has been to sustain GDP growth by 1.3% within the budgeted sector, while productive activities remained inert.

The note also refers to other functions, reminiscent of an alleged resizing of the state sector based on greater efficiency and effectiveness of public spending, and the control of wages without productive support, excessive profits and payments to personal individuals, amongst other aspects. It’s hard to imagine that the foreign exchange market might be used for all this, but in the event that they say so, allow them to do it, since it’s mandatory to place order as soon as possible in an economy that doesn’t work.

The note concludes by mentioning that the final word goal must be to constitute an exchange marketplace for your entire economy with a single exchange rate that guarantees the reference to foreign currency echange of the national currency. Actually, this scenario, described in these terms, has not been presented in Cuba in a stable way since 1959.

Before that date, it must be remembered that the dollar and Cuban peso were on parity; that’s, they were quoted at the identical value. The identical regime that began in 1959, which remains to be in power in 2022, makes no presence of facing this issue.

And so they recognize that the implementation of the foreign exchange market is simply a small part “of a much larger scaffolding, where no isolated measure alone will bring satisfactory results.” I totally agree. Once more, the lyrics seem well written, but then, as in so many other times, the music is out of tune. What a pity. The foreign exchange market will likely be one other problem in a not very very long time.

*Translator’s note: The “Ordering Task” (tarea ordenamiento) is a group of measures that include eliminating the Cuban Convertible Peso (CUC), leaving the Cuban peso because the only national currency, raising prices, raising salaries (but not as much as prices), opening stores that take payment only in hard currency which have to be in the shape of specially issued pre-paid debit cards, and a broad range of other measures targeted to different elements of the Cuban economy.   

Translated by Regina Anavy for Translating Cuba


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